Four decades of mistakes and repetition of currency crises and observation
of the events of last two months must have been enough for the statesmen.

Dr. Alinaqi Mashayekhi says: Iran has been suffering from a blunder
committed by its politicians about “the value of the national currency” for
more than four decades. The “value of the national currency”, which is the
result of economic factors, is considered to be an honor in terms of the
performance of the political system of the country and is treated as cause;
the reason is poor economic management!
In order to maintain the value of the national currency, the authorities
instead of focusing attention on the causes of its depreciation focus on the
effect, which is the value of the national currency itself and thus cause a
further decrease in the value of the national currency and further weakening
of the economy.
The roots and causes of the devaluation of the national currency come from
growing liquidity against the growth of national production. When liquidity
grows faster than production, the money in the hands of the people grow
faster than the amount of goods and services that are supplied in the
economy. As a result, there is more money available for existing goods and
services. In fact, there is more money for purchase of a specific basket of
goods; therefore, commodity prices go up, inflation is created and the value
of the national currency goes down.
As the value of the money goes down, politicians, by focusing on the value
of money and in order to maintain its value, instead of curing the causes,
inject foreign exchange (dollar or euro) into the currency market. They want
to maintain the value of the national currency by increasing the supply of
foreign exchange and prevent the exchange rate from rising. But this has
several destructive consequences. First, by stabilizing the exchange rate,
while the prices of domestic manufactured goods have increased due to
domestic inflation, the prices of foreign goods, which have grown with less
inflation, have not risen as much as domestic goods; as a result the
purchase of foreign goods is cost-effective, and the foreign commodities
enter the country formally or are smuggled and oust domestically made goods
from the market.

The uproar over the closure of production units, unemployment of Iranian
workers and increased smuggling go up. National production is harmed and
reduced. With the weakening of domestic production, “the cause of
devaluation of the national currency” is strengthened, and more foreign
exchange should be injected in order to maintain the value of the national
currency. Imports – authorized or smuggled – increase and this further harms
domestic production; As a result, economic activists come to the conclusion
that production is problematic and detrimental and therefore not wise; so it
would better to go after import of goods and distribute them.

The second destructive effect is on exports. Due to domestic inflation and
the fixing of the exchange rate, the price of domestic goods abroad goes up
and demand for Iranian goods and services in foreign markets goes down. As a
result, domestic production cannot be exported and it gets weak and foreign
exchange earnings from export of products decline. With the weakening of
production the “cause of devaluation of the national currency” is boosted.
More foreign exchange should be injected into the market to keep the
exchange rate constant. However, with lower exports and less foreign
exchange earnings, there will be less foreign currency to supply to the
forex market; and the supply of more foreign currency eventually stops.
In addition, when production becomes weak then less taxes are collected and
the budget deficit increases. This in turn would increases liquidity and
thus another cause of devaluation of national currency which is the growth
of liquidity is strengthened.
Therefore, in order to preserve the value of the national currency, the
statesmen will strengthen the depreciation of the currency without paying
attention to its causes, and merely through the injection of foreign
currency into the foreign exchange market.

But since forex reserves are limited and foreign exchange inflows into the
market cannot continue, the exchange rate will eventually jump and the value
of the national currency will fall. The fall in the value of the national
currency would cause economic instability, and public confidence in the
economy and economic growth is harmed.

This experience has been repeated four or five times since the 1979 Islamic
Revolution and strangely enough our politicians have not yet learned from
it. As a result, over the past four decades, production has always been
weak, and instead imports, smuggling and rent-seeking from foreign exchange
have been rampant. As a result of these experiences, we often hear from the
economic activists that production in Iran is problematic and not
cost-effective. Funds are spent more on leaving the country by using cheap
currency, imports, speculation, land and construction.

The volume of capital spent on construction of expensive residential units,
villas and commercial centers, which are mostly unused, is estimated at up
to $250 billion. With the sound management of the foreign exchange market,
these funds should have gone towards production and boosted production,
employment and exports.

Four decades of mistakes and repetition of currency crises and observation
of the events of last two months must have been enough for the statesmen.
They must have learned that when liquidity grows more than production and
domestic potential inflation is higher than the global average, they should
take the following appropriate approach:

1. As it has been recommended in the development plans, the authorities must
allow the foreign exchange rate to be gradually increased in proportion to
the difference in potential inflation, which is calculated on the basis of
liquidity in order not to lose domestic production against imports and
Iranian goods and services in other countries would not lose their
competitiveness in terms of price. To sum it up, action must be taken so
that national production, which is the infrastructure of the country’s
economic power, would not be harmed.

2. With the intensification of financial discipline in the government,
budget deficit and rising liquidity beyond national growth would be avoided.
Sound monetary policies too would prevent more money to be generated by the
banking system.

3. With the improvement of the business environment by strengthening the
competitive environment inside, deregulation and facilitation and
acceleration of economic activities, there would be more transparency in
government transactions, and a fierce campaign against corruption would
allow faster growth of production.

4. Only in
emergencies and states of war, part of the proceeds from oil and major
commodities derived from oil and gas be allocated to the supply of basic
goods. Of course, the pricing of basic goods and how to help low-income
groups to buy those goods is a separate issue. This should be done in a way
to ensure the supply of those goods to low-income groups and at the same
time not let any harm to production of basic goods in the country.